Dr. Tom Brown received a law degree from the University of Louisville in 1969 and practiced law and business consulting in Washington, D.C., Indiana, Oklahoma, and Colorado from 1969 to 1996. He earned a doctorate from the Graduate School of Public Affairs at CU-Denver in 1999, where his dissertation focused on the effects of the 1992 TABOR amendment on local governments in Colorado. He has done research for the CU Policy Collaborative and published in Public Budgeting & Finance, a national journal.

After two years of hearings and court battles, Amendment 21 is now on the November 7th Colorado general election ballot. The initiative was authored by Douglas Bruce, who successfully carried the 1992 TABOR (Tax Payer Bill of Rights) initiative which became Article XX of the Colorado Constitution. This earlier initiative required a vote by the general electorate of any tax increase by state or local government. It also enacted limits on the annual growth of revenue based on inflation and population growth.

If approved by a majority of voters, the proposal will amend the language of the original TABOR amendment and the Colorado constitution by adding a new section:

"(8)(d) Tax Cuts. A $25 tax cut, increased $25 yearly (to $50, $75 . . .), shall lower each tax in each tax bill (emphasis added) for each 2001 and later district: utility customer and occupation tax and franchise charge; vehicle sales, use, and ownership tax; yearly income tax; property tax; income and property tax equal to yearly revenue from sales and use taxes on food and drink other than tobacco and alcohol; and income tax equal to yearly revenue from estate taxes. (8)(d) tax cuts and state replacement of local revenue shall not lower state or local excess revenue, the state may limit local acts increasing replacement costs, joint income tax returns equal two tax bills, and attorney fees and costs to enforce (8)(d) shall always (emphasis original) be paid to successful plaintiffs only."

What does Amendment 21 mean for taxpayers and local governments?

The language and provisions of Amendment 21 appear ambiguous. Some provisions will undoubtedly be challenged, and then interpreted by the Colorado Supreme Court. It appears that the proposal would require each tax bill from each taxing government to be reduced by $25 during the year 2001, then by $50 during 2002, $75 in third year, and so on, increasing by $25 each year in perpetuity. The tax bills affected would include those for utility customer taxes, occupation taxes, franchise taxes, property taxes, sales taxes on vehicles, ownership taxes on vehicles, and income taxes. Joint income tax returns would be equal to two tax bills, entitling the joint filers to two tax reductions in the applicable amount for the year in question. In addition, those governments that charge a sales tax on nonalcoholic and non-tobacco food and drink would have to deduct the revenues realized during 2001 from their property tax bills as mailed in 2002 and then again in succeeding years. The refund would be $25 per bill in the first year, increasing to $50 the second year, and so on until all of these revenues were being refunded.

On his website (www.taxcut2000.com), Mr. Bruce contends that the proposal requires state government to replace those local government revenues lost to the escalating tax cuts. While an earlier version of the initiative included such language, the only mandatory language remaining says that "successful plaintiffs' attorneys shall always be paid their fees and costs." Under current law, Colorado's Public School Finance Act of 1994 (as amended) will require the legislature to replace most of the property tax revenues lost to school districts. There is no such provision, either in statute or the constitution, for revenue replacement to other types of local government.

Amendment 21 does clearly require a first year reduction of $25 (probably only to the extent of the tax due) in the property tax for each unit of government that levies a property tax. A sample of one such bill for a home of $139,100 actual value in Aurora (Arapahoe County) indicates how this will work:

Cherry Creek School District 5

$719.41

- $25.00

Arapahoe County

185.72

- 25.00

Arapahoe County L.E.A.

67.51

- 25.00

Arapahoe Park & Recreation District

27.74

- 25.00

Arapahoe Library District

51.99

- 25.00

Cunningham Fire District

199.14

- 25.00

E. Cherry Creek Water & Sanitation

85.96

- 25.00

Urban Drainage & Flood

8.88

- 8.88

Total Levy

$1,346.35

- 183.88

For the first year, each of these listed amounts would be reduced by a maximum of $25, with lesser amounts if the tax due is less than $25. In this example, the homeowner would save $183.88 the first year. The second year, the reduction would be $50, thereafter increasing by $25 each subsequent year forever.

The example of this one tax bill illustrates one of the immediately apparent impacts of the amendment: in the first year alone, the Urban Drainage & Flood District would lose all of its $8.88 tax from this homeowner and the Arapahoe Park & Recreation District would lose about 90% of its assessed tax. In the second year, neither of these governments would receive any property tax from this homeowner.

In addition to these cuts of the property tax itself, the amendment would further reduce property tax bills from any government that collects a sales tax on non-alcoholic and non-tobacco food and drink by up to $25 the first year, $50 the second, etc., up to the maximum amount of this part of sales tax revenue. Since there is no other mechanism in the amendment for refunding these sales tax revenues, it appears that any government collecting the sales tax, but not assessing a property tax would not have to refund any of the revenue. Likewise, if the prescribed deduction from property tax bills did not absorb all the revenue in some year, the government could keep the balance.

While the appeal of lower tax bills is undeniable, these tax cuts will clearly reduce local government revenues. The question becomes how much which governments will lose in revenue and what the implication will be for public services.

The results of Amendment 21 by level of government and region

The Colorado Department of Local Affairs lists 2,169 active local governments in the state, including 63 counties (with the city and county of Denver), 268 municipalities, and 176 school districts, with the remaining 1,700 being an assortment of special districts. These special districts provide a wide variety of services and facilities, including among others, hospitals, libraries, parks and recreation, ambulance and emergency services, fire protection, cemetery maintenance, pest control (weeds, mosquitos, etc.), water and sewer systems, water conservation, and community improvements.

The vast majority of these governments rely on property tax revenues for some or all of the public services and facilities they provide. For many of the special districts, property taxes provide all of their revenues. This report examines only the property tax and does not include the other taxes that would be affected by the proposed amendment.

This study used property tax data from 57 counties to compute each property tax bill for each government beginning with bills for 2001 property taxes to be mailed in January, 2002 and finishing with property tax bills for 2005 to be mailed in January, 2006. More than 1.7 million individual bills were examined. Each was calculated without the effects of Amendment 21 and then, again, after the tax deductions that would be required by the amendment during its first five years.

For purposes of this study, property values were projected to change at the compound annual rate experienced by each government from January 1, 1993 through January 1, 1999, three complete biannual assessment cycles. The study used year 2000 mill levies for each government and, because of the TABOR amendment, assumed that these levies did not change. Because property value change was computed and lowered by the 1993-99 period of declining residential assessment ratios, the study did not introduce a further decline in this ratio.

The following table shows the estimated first year property tax impact on the local governments included in this study. (Note: even though all governments in 57 counties were studied, some individual governments were not included because they could not be calculated to within a margin of error of plus or minus 5 percent.)

Table 1

Impact Study by Type of Government (Statewide)

Type of Gov't.

No. in Study

Total Estimated 1st year property tax revenue without Amendment 21

Estimated Amount of Property Tax Revenue Lost in 1st year to Amendment 21

Percent of Total Estimated Property Tax Revenue to be Lost in 1st year

Counties

49

$636,562,584

$36,226,668

6%

Municipalities

196

146,540,582

16,804,415

12%

School Districts

137

1,431,117,340

36,576,743

3%

Fire & Ambulance Districts

188

106,198,426

16,467,914

16%

Hospital Districts

22

14,944,127

4,817,060

32%

Library Districts

31

39,753,879

8,807,866

22%

Park & Recreation Districts

39

25,881,558

5,698,444

22%

Pest and Mosquito Control Districts

18

1,459,919

919,683

63%

Cemetery Districts

62

1,519,745

920,345

61%

Water Conservancy Districts

39

11,969,865

6,290,666

53%

Metropolitan Districts

158

107,352,067

2,943,471

3%

All Other Districts

299

74,259,265

18,789,783

25%

TOTALS

1,238

$2,597,559,357

$155,263,058

Some governments will experience less loss and some will experience more than these averages indicate. For example, the maximum first year loss among fire and ambulance districts is 87%, among libraries the maximum is 85%, and one hospital will lose 85% of its property tax revenue. Centennial R-1 School District in Costilla County will lose 63% of it property tax revenues in the first year. Of course, these are losses only of property tax revenues, but they are the only revenues for most of these governments. For example, fire districts cannot levy any tax other than property tax, and, for them, fees for service are not feasible

Even as the first year impacts are not equal for all kinds of Colorado's local governments, they are not equal for all regions of the state, either. The five county commissioner districts represent a reasonable approximation of different economic regions of the state

The following table shows the first year property tax impacts for all types of governments (in the study) within each of these regions.

Table 2

Impact Study by Region (All Types of Governments)

Region

Total Estimated 1st year property tax revenue without Amendment 21

Estimated Amount of Property Tax Revenue Lost in 1st year to Amend 21

Percent of Total Estimated Property Tax Revenue to be Lost in 1st year

Eastern Plains

$58,063,633

$5,190,930

9%

Southern

55,351,629

9,769,236

18%

Mountain

290,012,102

24,595,379

9%

Western

259,942,013

22,333,921

9%

Front Range

1,956,534,037

96,270,808

5%

TOTALS

$2,619,903,414

$158,160,274

Thus, it is apparent that for many districts, particularly in southern Colorado counties, the cuts are deep and will mean substantial reductions in services even in the first year. There is not a government in Costilla County that would lose less than 30 percent of its revenues in year one. In some instances, the governments may not be able to operate at all due to the magnitude of the cuts relative to their total budgets. With each succeeding year, another $25 is added to the amount of the tax cut.

Mr. Bruce, the author of the amendment, has publicly stated that the ever increasing tax cut amount will not eliminate the property tax, but will only reduce the rate of growth in property tax revenues. Whether this is true or not depends upon five key variables, listed below:

1.the rate at which property values rise

2.the amount of a particular mill levy,

3.the rate of change in the residential assessment ratio under the Gallagher amendmen

4.the value of the particular property, and

5.whether that property is residential.

For many smaller special districts, especially in rural areas, mill levies are low and property values are not rising much, if at all. Under these circumstances, some districts could lose all their property tax revenues in just a few years. Other districts with higher mill levies, in areas with rapidly rising property values, will experience an initial reduction in property tax revenues and then these revenues will again begin to increase.

This feature of the amendment proposal is illustrated by the following table showing the overall property tax impacts of the proposed amendment, by type of government, from the first year through the fifth year. Some districts with relatively high mill levies show an overall rise in property tax revenues, while others with lower mill levies show an overall decline. It is important to note that these are not annual average rates, but are five-year overall rates that even if rising may well not be keeping up with inflation or population growth over the period. If they do not keep pace with either of those factors, the effective ability of governments to meet service demands would be reduced despite an overall rise in revenues.

Just as the first year effects of the proposed amendment will not be equal across all regions of the state, the five-year impacts, likewise, are markedly different. The following table shows these overall, five-year impacts for all types of governments in each region.

Although it is doubtful that five-year increases of 12 or 13 percent will be sufficient to keep pace with inflation and increased populations demanding public services, there is no doubt that overall declines in revenues in the Southern and Eastern Plains regions will not keep pace with either of these factors.

This study has dealt with only one of the taxes affected by the proposed amendment, the property tax. However, some results are apparent.

The impacts will fall most heavily and quickly on rural governments in the least economically prosperous regions of the state.

Even in much more prosperous regions, small governments with low mill levies will be impacted. There are almost 1,700 special district governments in the state and they perform a variety of functions. Those that will be most affected include volunteer fire protection districts, library districts, county hospital districts, ambulance districts, and cemeteries.

Many units of local governments will lose significant revenue.

People who live in areas which have relied heavily on special purpose districts, rather than municipal or county governments, to provide services will receive much larger total tax cuts than other Colorado citizens.

Implications of replacing lost local revenues from alternative sources

Proponents of Amendment 21 suggest two ways of replacing lost local revenues.

1.The state legislature can appropriate monies from the state budget sufficient to make up the lost local revenues, or

The public policy implications of the tax increase alternative are that property taxes on all properties other than residential would be increased enormously. Colorado's Gallagher amendment mandates that the percentage of total property taxes paid by residential properties remain constant at 45%. This means that, commercial, agricultural, and business properties are assessed at a fixed 29 percent of market value, while residential properties are assessed at a rate that may change every two years. Currently residential properties are assessed at 9.74 percent of market. In addition, to paying higher property taxes per dollar of market value, businesses also pay more because their total market value includes personal property that is not included for residential owners. In the future, the 29 percent rate for commercial properties will remain constant, while the residential rate is projected by the Legislative Council to decline to about 8.4 percent by 2005.

The following example of hypothetical business and residential properties of equal market values illustrates the effect:

Table 5

Business vs. Residential Comparison

Business or Agricultural

Residential

Market Value - real

$100,000

$100,000

Market Value - personal

$25,000

Total Market Value

$125,000

$100,000

Assessment Ratio

29%

9.74%

Assessed Value

$36,250

$9,740

Existing Mill Levy

40 mills

40 mills

Existing Property Tax

$1,450

$390

Mill Levy Increase

25 mills

25 mills

Property Tax after Increase

$2,356

$633

Key implications for local governments

One policy implication of the state replacement alternative is that local fiscal autonomy will be lost to the state government. Although proponents suggest that this replacement is mandated by the amendment "with no strings attached," this seems unlikely. Whether mandated or not, if the state provides the money, the state will determine who gets how much and for what purpose. Since the state is accountable for the spending, there will have to be an administrative bureaucracy and local governments would be funded only by some formula that may not anticipate all local variations. In addition, there would be probably be competition among local governments for available state funds. Competition implies the need for some lobbying effort by those governments that want to enhance their chances for getting any special needs or circumstances considered, thereby raising the cost of local government.

Another result of Amendment 21 and the state replacement alternative is significant impact upon the state's general fund revenues and spending. Considering the direct impacts from the proposed cuts in state taxes and all of the local government taxes such as vehicle ownership, sales taxes, and property taxes, the Legislative Council's "An Analysis of the 2000 Statewide Ballot Proposals . . . ," (the "bluebook," research publication no. 475-6 dated September 11, 2000) estimates that state general fund revenues will be reduced by $65 million in 2001 and local government total revenues by $169 million. In 2002, when the property tax cuts take effect, these reductions jump to $263 million of state revenue and $580 million for local governments.

If the state were to replace these lost local revenues, the combination of cuts in state general funds and the cost of replacing local revenues would equal $843 million in 2002. This is equal to almost 15 percent of the anticipated fiscal year 2001-02 general fund appropriations. By 2003, this combination increases to $1.3 billion. Total general fund appropriations in fiscal year 2002-03, without these reductions, are forecast by the Office of State Planning and Budgeting to be about $5.98 billion. The reduction would amount to more than 20 percent.

Of course the legislature would decide which specific state programs to cut back, but the magnitude of the challenge can be appreciated by comparing these reductions to some of the state's past general fund spending. The following table shows the state's general fund spending by selected program areas (State Comptroller's Comprehensive Annual Financial Report):

Table 6

Selected State General Fund Spending, FY ending June 30, 1999

Program Area (not all program areas)

Amount Spent (Dollars in millions)

General government

$199.6

Business, community, and consumer affairs

192.7

Education (other than Public School Finance Act)

64.1

Health and rehabilitation

403.9

Justice (includes law enforcement, courts, and prisons)

641.3

Natural resources

57.4

Capital outlays

20.3

Debt service

6.1

If Amendment 21 is adopted by Colorado's voters there will be substantial and immediate consequences for local governments and their citizens. These consequences will not fall evenly on all local governments or on all parts of the state. Those governments with the lowest mill levies and the least property tax revenue, such as rural, volunteer fire departments, libraries, cemetery districts, water conservancies, that are arguably the most efficient will be impacted most quickly and most drastically. Governments in rural areas such as the eastern plains and southern counties will be especially affected.This means that that small, rural governments will either be competing for state replacement funds with larger, urban governments or will need to ask for tax increases on already low tax bases.

Lastly, the structure of local control which has been operating in Colorado since the state was founded in 1876 will be fundamentally changed by the tax cut if state replacement of revenue is the eventual solution.

_________________________

Note: The specific data and individual analysis for those governments included in the study may be found on-line at www.dola.state.co.us under the "publications" link. Those counties and their governments missing from the study are Crowley, El Paso, Jackson, Kiowa, and Weld. Because of a variety of data issues, these counties could not be analyzed. However, an analysis of El Paso County governments, prepared by Ken Kile, County Treasurer, is available on-line at http://www.co.el-paso.co.us/treas.

Much of the research for this study was conducted while the author was a research associate of the CU Policy Collaborative, at the University of Colorado-Denver. Questions may be directed to the author of the study attm3brown@uswest.net.